Saliency Bias In Mutual Fund Portfolios And Its Implications For Stock Price Efficiency: Evidence From A Natural Experiment Shashwatalok And Nitin Kumar
Speaker(s) Prof. Shashwat Alok, Assistant Professor of Finance, Indian School of Business

We examine whether professional money managers overreact to the salient events using hurricane strikes as a natural experiment. Specifically, we analyze the trading response of mutual fund managers to the hurricane strikes with respect to the firms lo- cated in the disaster zone. We report two major findings. First, we find that managers close to the disaster zone underweight diaster zone firms more than that underweighted by the distant managers. Second, the underweighting of disaster zone firms is not driven by information asymmetry between the close and distant managers, rather this underweighting is driven by saliency bias. This saliency bias driven underweighting decreases with both time and distance. Finally, the managerial overreaction to the salient event is costly to the fund investors. A long-short strategy exploiting the extent of overreaction by close fund managers generates economically and statistically signifi- cant risk-adjusted returns. Overall, our paper provides causal evidence supporting the idea that the supposedly rational portfolio managers act in a behaviorally biased way by overreacting to the salient events.


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